For most people, inflation is bad news these days.
Except when it comes to tax planning, said Ed Slott, president of Ed Slott & Co., in “Smart Year-End Tax Strategies,” a recent webcast presentation from Financial Advisor magazine and The Money Show.
“Some of your clients will get into lower brackets because of inflation adjustments,” said Slott. “We’re having the largest move from 2022 to 2023, where more fund can be passed through the lower tax brackets. That’s all scheduled to end after 2025.”
That’s because many of the provisions of recent tax legislation are due to sunset in 2025, said Slott.
So while inflation isn’t great news—things cost more—it does play into the hands of tax planners.
“Where else is money going to come from to pay these rising prices for goods and services? One place that people don’t look except me is in tax savings,” said Slott. “People are looking to save here, save a few dollars there. That’s nothing in comparison to the tens of thousands or hundreds or millions that can be saved in good tax planning.”
There’s a chance that tax planners will look back at the years 2022-2025 as “the good old days,” said Slott, because of the combination of low rates and widening brackets.
But the conventional wisdom on good tax planning has changed, said Slott.
Paradigm Shift
Tax accountants and planners have for decades emphasized deferring taxes and income, said Slott.
“You were trained to put things off,” he said. “Now that logic doesn’t hold, the fundamental principle of all good tax planning, where you save the most money, is to always pay taxes when the rates are the lowest.”
Slott encouraged advisors to think of taxes like a stock. ”Buy low and sell high. Locking in low rates is the equivalent of buying income taxes at a low price,” he said. So rather than maximize tax-deferred accounts, advisors and investors should maximize tax-free accounts and convert assets from their tax-deferred accounts into tax-free accounts as they are able. he said.